What Frightens You?

Posted by Kelley LearcloseAuthor: Kelley Lear Name: Kelley Lear
Email: kelley.lear@redmoonsolutions.com
Site: http://blog.redmoonsolutions.com
About: Kelley is a member of the executive leadership team and leads our sales and marketing efforts at Red Moon Solutions. Kelley’s extensive experience in project management, product management, and consulting with Fortune 500 and Global 1000 clients is extremely important in this role.See Authors Posts (127) on Oct 11, 2011 | 2 comments

I thought the title was apropos for this time of year, with “All Hallows Eve” so soon upon us…what does frighten you?  Is it scary late night ghost stories by the fire, or watching a Michael Myers movie in your dark living room with the wind whipping outside your window pane, and the distant call of a coyote in the background?  Or perhaps it is the tall, dark and bony image of a grim reaper in dark robes invading your dreams…reaching out for you with an outstretched hand and ominous groan, with you waking up in a cold sweat?  Well, for many of you tax professionals out there (a bit more practical like myself), perhaps the scariest  thing you can think of is a “Material Weakness” or a “Tax Restatement”!  Every year I read Deloitte’s summary of “Tax Material Weaknesses” in SEC filings, and this year is no different.  I thought I would share some of these findings again and just remind you that if that “audit ghoul” does come knocking on your door…make sure you are prepared.  You don’t want yet another sleepness night worrying about income tax material weaknesses.  Year- end bonuses don’t seem to be as prevalent when those types of issues show their ugly heads.

Deloitte found that income tax related comments often include the following:

• Uncertain tax positions (of course!)
• Effective tax rate impacts from foreign entities
• Undistributed earnings of foreign subsidiaries
• Interim accounting
• Adequacy of disclosures

Per Deloitte,  material weaknesses in SEC Filings from 1/1/10 -12/31/10 breakdown via the following percentages:

• 29% due to Insufficient Review
• 17% pertaining to general procedural processes
• 17% because of personnel issues – either lack there of, or not properly trained
• 17% due to improper treatment recording
• 11% related directly to inadequate reconciliation (and who has time to analyze and reconcile the amount of data that needs to be reviewed on a regular basis?!)
• 5%  due to non-routine transactions (one-offs)
• 4%  because of a lack of documentation (at least that is fairly low now-a-days!)

The biggest culprits resulting in tax restatements were:

• Accounting for Income Taxes
• Deferred Taxes
• NOLs
• Uncertain tax positions

Imagine that?  Exactly what you would expect, I am sure.  The good thing is that if you know where the risks lie, just like in every day life, you can make adjustments (so, yes – if horror movies scare the pants off you, then don’t watch them!).   Select your “danger zone” or “scariest”area of risk and put together a risk mitigation plan.  A proper plan should always include people, process and technology.   You can’t simply get rid of your old provision spreadsheets and implement a provision software solution without looking at your current process and how things are being done.  You also need to make sure that your folks are properly trained and have the time and resources to be able to review data, tie out data, and reconcile data related to the process.  That is typically the biggest challenge.  Hopefully, with greater automation comes efficiencies, but you don’t want to implement a bad process to begin with.  We need to do away with the scary nightmares and night sweats.  Mitigate those risks and sleep easier. 

Let us know what frightens you.  One of my colleagues said that what really frightens him is FATCA Foreign Account Tax Compliance Act (FATCA).  What is it for you?